** This blog was updated on 4/6/20 as a result of changes made by the CARES Act **

The SBA Economic Injury Disaster Loan (EIDL), or 7(b)(2) loan, offers relief for qualifying small businesses of up to $2 million with up to 30 years to repay the debt and is focused on helping small businesses impacted by COVID-19 from January 31, 2020, through December 31, 2020.

Importantly, the CARES Act added to this program. The Act states that the outstanding balance on EIDL loans made between January 31, 2020, and April 3, 2020, can be refinanced into a Paycheck Protection Program (SBA 7a) loan. If the EIDL loan was not used for payroll costs, it does not affect your eligibility for a Paycheck Protection Program loan. If your EIDL loan was used for payroll costs, your Paycheck Protection Program loan must be used to refinance your EIDL Loan.

Below is more information on the loan and emergency grants, as updated by the CARES Act:

What are the Details Surrounding the Economic Injury Disaster Loan?

Eligible entities include:

• Business with not more than 500 employees
• Any individual who operates under a sole proprietorship, with or without employees or as an independent contractor
• A cooperative with not more than 500 employees
• An ESOP with not more than 500 employees
• A tribal small business concern as described in Section 31(b)(2)(C) of the Small Business Act (15 U.S.C. 657a(b)(2)(C)), with not more than 500 employees
• Private nonprofit organizations
• Small agricultural cooperatives
• Also includes during the covered period small business concerns, private nonprofit organizations and small agricultural cooperatives who applied for the SBA EIDL loan.

>> Read "Is Your Business a Small Business for the SBA Economic Injury Disaster Loan Program?"

In response to COVID-19, the following provisions have been modified for applications made under the EIDL program:

• Loan amount: up to $2 million
• Loan Term: up to 30 years based upon ability to repay
• Interest Rate: 3.75% for small businesses, 2.75 for private not-for-profits
• No prepayment penalties
• Deferral of payments for the first four to 12 months, depending on the situation
• Loan use: Working capital loans may be used to pay fixed debts, payroll, accounts payable and other bills that could have been paid had the disaster not occurred. In addition, expanded uses include:
  • Providing paid sick leave to employees unable to work due to the direct effect of the COVID-19
  • Maintaining payroll to retain employees during business disruptions or substantial slowdowns
  • Meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains
  • Making rent or mortgage payments
  • Repaying obligations that cannot be met due to revenue losses
• Waives personal guarantee for loans less than $200,000
• For loans greater than $200,000 personal guaranty and/or security; real estate is preferred but doesn’t result in denial of application
• Waives the requirement an applicant needs to be in business for one year before the disaster for businesses in operation prior to January 31, 2020
• Waives the requirement that the applicant is unable to obtain credit elsewhere
• For small dollar loans (not defined) provides that the administrator may:
  • Approve an applicant based solely on the credit score of the applicant and shall not require an applicant to submit a tax return or tax return transcript for approval, or
  • Use alternative appropriate methods to determine the applicant’s ability to repay

Below is a link to the website and some additional information you will need for your application:

• https://disasterloan.sba.gov/ela/
• Check to ensure your area is an eligible disaster area. All 50 states have been approved.
• Have the following documents ready:
  • Tax authorization form (IRS Form 4506-T)
  • Last two years of business returns
  • Last two years of business returns
    • Personal financial statements of owners (Loan is guaranteed but are favorable terms of 3.75% (2.75% nonprofit) and up to 30 year payback)

What are the Changes to Emergency Grants?

• Through December 31, 2020, an applicant for a SBA EIDL loan can request an advance of $10,000 three days after the administrator received the application
• Before disbursing the advance the administrator will verify that the applicant is an eligible entity by accepting a self-certification from the applicant under penalty of perjury
• Repayment of the advance is not required even if the applicant is denied an EIDL Loan
• If the applicant transfers into, or is approved for a Paycheck Protection Program loan, the advance amount will be reduced from the loan forgiveness amount for a loan for payroll costs made under Section 7(a)
• Appropriations is authorized for $10 billion for this section.

For further questions, call the SBA Disaster Loan office at1.800.659.2955

Contact David Sobochan at dsobochan@cohencpa.com, Adam Hill at ahill@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.